“While we have a supply shortage and demand is strong, rents in our view will remain robust in 2011,” Dubai-based Kamran Butt, head of Middle East and India Private Banking Equity Research for Credit Suisse told Arab News.
He stated the current housing supply in Jeddah and Saudi Arabia needs to double in order to satisfy existing and new demand.
“We expect continued demand for housing in Saudi Arabia, the largest population in the GCC, to reach about 2 million housing units in the next three years,” Butt said.
In the past, developers had blamed the high cost of rents on higher prices of raw materials. However, Credit Suisse said this is not the case.
“The cost of construction is not correlated with rent prices. It is more of a supply and demand aspect,” the analyst said.
Currently, more than 55 percent of Saudi residents rent due to the high prices of land and housing, which have become unaffordable for low to middle income families without mortgage lending as an option for home ownership.
Even if a mortgage law is enacted this year, it would only help reduce rent prices if local banks and the law encourages householders to buy more instead of rent. "But then there are other factors like cost of financing and property prices which has to be taken into consideration,” the analyst said.
A shortage of housing and rising land costs is causing residential prices in Jeddah and Riyadh to soar by as much as 30 percent, market intelligence CB Richard Ellis said in a fourth-quarter 2010 study, attributing the shortage to the Kingdom’s population, which has grown by 20 percent since 2002.
Residential rents are likely to experience the greatest demand pressure of all sectors, with rental growth likely to remain broadly in line with inflation rates of 4 to 6 percent during the next few years, the research stated.
The study also said that cap rates yields for high quality income producing real estate assets are considered to stay broad in the range of 9 to 10 percent for the year, depending on market sector, age, location, and conditions.
Rents and food prices have been the main drivers of inflation in the oil-rich nation, which posted inflation rates of 5.3 percent in January, the lowest since April 2010, with rents nonetheless rising by 0.8 percent in January.
